Definition of Sovereign risk:
Sovereign risk is the probability that a foreign nation will either fail to meet debt repayments or not honor sovereign debt payments or obligations. In addition to the risk to bondholders of sovereign debt, sovereign risk is one of many unique risks that an investor faces when holding forex contracts (other such risks including currency exchange risk, interest rate risk, price risk, and liquidity risk.).
Sovereign risk is the chance that a national government's treasury or central bank will default on their sovereign debt, or else implement foreign exchange rules or restrictions that will significantly reduce or negate the worth of its forex contracts.
Probability that the government of a country (or an agency backed by the government) will refuse to comply with the terms of a loan agreement during economically difficult or politically volatile times. Although sovereign nations dont go broke, they can assert their independence in any manner they choose, and cannot be sued without their assent. Sovereign risk was a significant factor during 1970s after the oil shock when Argentina and Mexico almost defaulted on their loans which had to be rescheduled.
How to use Sovereign risk in a sentence?
- Sovereign risk is typically low, but can cause losses of investors of bonds whose issuers are experiencing economic woes leading to a sovereign debt crisis.
- Sovereign risk is the potential that a nation's government will default on its sovereign debt by failing to meet its interest or principal payments.
- Sovereign risk can also directly impact forex traders holding contracts that exchange for that nation's currency.
- Strong central banks can lower the perceived and actual riskiness of government debt, lowering the borrowing costs for those nations in turn.
Meaning of Sovereign risk & Sovereign risk Definition